Foley Wines' (NZSE:FWL) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Foley Wines (NZSE:FWL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Foley Wines is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.043 = NZ$9.8m ÷ (NZ$246m - NZ$18m) (Based on the trailing twelve months to December 2023).

Thus, Foley Wines has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 11%.

See our latest analysis for Foley Wines

Historical performance is a great place to start when researching a stock so above you can see the gauge for Foley Wines' ROCE against it's prior returns. If you're interested in investigating Foley Wines' past further, check out this free graph covering Foley Wines' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Foley Wines in recent years. The company has employed 70% more capital in the last five years, and the returns on that capital have remained stable at 4.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Foley Wines' ROCE

In summary, Foley Wines has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. Therefore based on the analysis done in this article, we don't think Foley Wines has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Foley Wines (1 shouldn't be ignored) you should be aware of.

While Foley Wines may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.